Fees in dollar terms? Easier said than done
Work is under way to require superannuation savings scheme providers to report on their annual fees in dollar terms – but some providers say that might be harder than some expect.
Wednesday, September 28th 2016, 6:00AM 
5 Comments
by Susan Edmunds
The Financial Markets Authority, Commission for Financial Capability and Ministry of Business, Innovation and Employment are working on a project that could lead to some fund managers being required to change the way they disclose fees.
MBIE financial markets manager James Hartley said the Commerce Minister had commissioned work on annual statement reporting of KiwiSaver, superannuation and workplace savings schemes earlier in the year.
“The annual statement work focuses on making KiwiSaver statements easier to read and gives us an opportunity to consider ways we can ensure banks and fund managers make clear and easy to interpret disclosure information available to consumers.”
The work is being led by MBIE. It proposes that annual statements should include a projected retirement balance and income figures, and the total fees the investor has paid in dollars.
At the moment, most report on fees as a percentage.
MBIE is finalising a document for consultation about implementing the changes.
But there are concerns that it could be hard to implement, particularly for big providers with a range of diversified and outsourced products.
Grant Hodder, head of product, funds and private bank, at ANZ, said he was supportive of transparency. But the transition might not be straightforward.
“Providers will need to build an engine to calculate the fees in dollar terms for members and then feed that into the annual statement information so this will take some time,” he said.
“Any calculations will also need to account for members who have sums of money spread across different funds within a KiwiSaver scheme. And before anyone can start we need to agree on details – for example whether to calculate on an average balance for the year or end-of-year balance. It is all achievable but there is a bit in it so will take some time to build.”
One fund manager who did not want to be named said each provider would have to calculate the fees at a client level, across thousands of people. “Doing it at an individual client level would add a lot of cost that the client might end up paying for possibly for little additional benefit.”
George Carter, of Nikko, agreed there was more to think about. “Often for retail investors the fund management fee is just one aspect of the total fee. For this to be effective, it would be necessary to get a total fee picture which would require inclusion of platform fees, advice fees as well. Otherwise, if the focus is on just one area things have a habit of migrating to other less well-disclosed areas."
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Comments from our readers
What would have been useful is markets dropped 2% today because .......and have averaged +7% for the past x years.
Percentages add perspectives in finance in many cases far more than amounts.
Investors would surely want to hear nett average returns in % over 1,3,5 and 10 years and what % the fees were.
Far more enlightening, one would have thought.
E.g I averaged 4% pa nett over 7 years and the fees were 2% pa. Oops better move on.
Or I averaged 6% nett and the fees were 1% pa. Sounds reasonable.
Dollars instead of % likely as not will just discourage people.
So just for a change let’s get some perspective on management expense ratios of 2-3% pa. This perspective might be useful to the FMA who are on record as saying that they now require fund management fees to be fair :
• Academic research tells us that we should expect global equities to outperform long dated bonds by about 3% pa. So annual fees of 3% effectively deliver retail investors the return of bonds with the risk of equities. That doesn’t sound like a good deal, let alone fair.
• Looking at returns another way Keith Ambachtsheer, Director Emeritus of the International Centre for Pension Management, writing in the London Financial Times last month, estimates that global equities will return 3.6% a year after inflation, pre tax, pre fees. If inflation is 2% then a 3% fee structure appropriates more than 50% of returns. That doesn’t sound fair either.
• The most popular exchange traded funds in the US have annual fees of between 5 and 10 basis points i.e. between .05% and .1%. In this context fees of 3% pa or 300 basis points doesn’t sound particularly fair.
• Last but not least the SEC website in the USA tells us that each 1% in annual fees reduces the terminal sum over a 20 year saving period by 18%. So a 3% fee structure which reduces your terminal sum by more than half doesn’t sound fair.
Why the MBIE and the ex bankers working at the silly old Ministry of Smiling and Financial Capability would sanction this stupid change I don’t know…... Oh gosh I do know. I’m waiting for the MBIE and the FMA to come out and say something sensible like the actual dollar amount for fees are useful but to get some proper perspective on fees analysis of percentages are the way to go.
Regards
Brent Sheather
We asked a local fund manager to disclose the actual fees paid on an investment in their unit trust. They couldn’t but they could disclose the total fees on the fund. From this anyone with a calculator can work out the fees as a percentage easily enough.
But the crux of this is that it will cost more to deliver the dollar figure data than what it’s worth. That cost will be passed onto investors – result: higher fees – what a ridiculous outcome.
Globally, fund managers are coming under pressure to reduce fees – ETF’s represent a third of all mutual funds in the US now – the heat is on fund managers everywhere.
The KiwiSaver industry, ie banks, are using the FMA, MBIE and Commission for Financial Capability as lap dogs in rebutting this trend.
This definition is reflected in concepts like ‘Management Expense Ratio’ (MER), and more recently the ‘Synthetic Total Expense Ratio’ (TER) defined in section 24 of the KiwiSaver (Periodic Disclosure) Regulations 2013.
Brokerage when securities are bought and sold falls outside this definition. The truth is, smaller direct investors typically face higher brokerage costs than they would if they invested in a fund the bought and sold the same assets. Other assets funds can invest in, such wholesale funds, can be difficult or impossible for smaller individual investors to access.
Fund management costs are a significant consideration for prospective investors weighing up their options. This makes their clear, concise and effective disclosure an important consumer protection.
I am no advocate for the managed fund industry, but fund costs do need to be offset against benefits like lower brokerage, and access to wholesale markets. Fund managers can use sophisticated tools and strategies that smaller investors often can’t: such as managing currency risks, and using futures and options to buy ‘downside protection’ at times of high volatility.
And we shouldn’t forget the ‘convenience factor’. Fund investors often avoid complex accounting and tax costs; and the time, effort and advice required to deal with a procession of corporate action options. And fund investors can usually access valuation and other fund details with just a few clicks over a morning coffee.
Like advisers – another cost to weigh up – funds can have their place.
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Good Lord!
Does this mean that "the industry" has no sales analysis systems in place to determine who gets charged how much for what?
And so has no way of telling valuable customers from invaluable customers?
How very 1970s!